Tuesday, 3 November 2015

In a revealing article [page 72 onwards of this] published last year, Francis Salway, former chief executive of the largest listed property company in the UK, Land Securities, explained that developers don't relish huge empty sites like the former quarries at Ebbsfleet.

They like "established demand" and "existing communities", he wrote, which prove people really do want to live there. The developers like to "limit the forthcoming supply" - that is, to ration how many homes come on to the market at one time so that the market is not flooded.*

Exactly. Apart from providing shelter, when you buy a house, you are paying for access to an "established community" i.e. jobs, shops, schools, neighbours good or bad, transport links to other towns etc.

The developers - i.e. the bricklayers, roofers, architects and the material suppliers - have to be paid for their inputs to the finished house, of course. But who is 'providing' the "established community"? The developers? The landowners? Methinks not. So why do they get paid for its existence? And if you buy an existing home from somebody who is moving away, what contribution is he going to make to the "established community" in future? Precisely nothing, of course. So why should he get paid for it?

Ho hum.

* Which puts the developer in a tricky position, on the one hand they like to drip feed new homes onto the market, but on the other hand, the more homes already exist, the easier the new ones are to sell. Prisoners' dilemma with one prisoner.

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comments:

'Developers' do the 'organisation' bit. But, as you say, they, or more likely the landowner they buy the land from, make a lot of money off location. And that's where LVT comes in. If they were paying LVT on the site value - i.e. the house plot value - they'd be incentivised to get properties sold. Apropos of which I think that this would lead to much lower stocks of plots. In that there'd be a spree of building on the introduction of LVT as they tried to reduce their plot stock. It's probable that all spec house builders would end up with about 2 years stock of plots (like small developers currently do), as opposed to the approximate 10 years stock that large developers hold.

No developers do not drip feed properties they are just as influenced by supply and demand as everyone else. For them building and selling in the shortest time possible is always their goal. It may look like they are drip feeding but although the building of a home is considerably faster than in the past it is still a relatively slow process. Unlike other industries that can mass produce quickly developers cannot as yet. No doubt in time mass production will become possible a by product of which will be in bringing down construction costs considerably so making homes cheaper. We cannot mass produce land but we can make more of it available so if supply goes up prices will come down.

You are always saying that the house prices are not affected by supply and demand. That is simply not true.

A, if the simplistic "supply and demand" rule applied, then why are land and buildings most expensive in the areas where there are the most land and buildings? Why is London more expensive than the Highlands of Scotland?

"You are always saying that the house prices are not affected by supply and demand."

That is simply not true. We have always acknowledged that supply and demand has some effect, but that it is a micro, not a macro effect, thus if a developer puts 200 houses onto the market at the same time, they will take a long time to sell, as, outside London*, it is unlikely that there are sufficient buyers who want to live in that location. The developer can increase the number of potential buyers by lowering the prices of his houses, but he is unlikely to do that, because it will cut into his profits and will affect the value of the remaining plots, against which he has probably borrowed money. So the developers release the houses onto the market at the optimum rate given the demand in the locality, which has the added benefit that it helps the cash-flow. You seem to think that "drip feeding" and "building and selling in the shortest time possible" are mutually exclusive, when in fact, they are the reverse. That's the micro bit.

However, putting 200 houses on the market in one town is not really going to affect prices in the next town very much. That's the macro bit. In the past, building booms, e.g 1960s and 70s, have been accompanied by rises, not falls in house prices.

*inside London, the areas where demand is at its highest is already built up, so it is simply not physically possible to increase the supply to any meaningful level vis a vis demand.

All. Point of information. All small developers seem to hold between 1 and three years stock of plots. I think that this is the result of a set of sums including factors like the cost of finance, time it takes to build and sell and house/flat, resource availability (labour, materials), good plots etc. In fact the classic 'entrepreneurs' guessing about the future.